Corporate Finance - Desklib

This article discusses various aspects of Corporate Finance including internal rate of return method, advantages of IRR method, and its capacity to price real options. It also includes solved assignments and essays on topics like bond valuation, interest rates, and more. The article is relevant for students pursuing courses in finance, accounting, and related fields.

Running head: CORPORATE FINANCE
Corporate Finance
Name of the Student:
Name of the University:
Authors Note:

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Table of Contents
Question 1:.................................................................................................................................2
Question 2:.................................................................................................................................2
Question 3:.................................................................................................................................3
a) Annual nominal yield of bond:..............................................................................................3
b) The annual rate of return on each of the indices:...................................................................3
Question 4:.................................................................................................................................4
a) Calculating the current price of each bond:...........................................................................4
b) Calculating the duration of each bond:..................................................................................5
c) Calculating price of the bond where market interest rates were to rise in 8%:......................5
Question 5: Discussing and comparing the attributes that give IRR method its reliability and
assess it capacity to price real options........................................................................................5
References and Bibliography:....................................................................................................8

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Question 1:
Particulars Value
Cost 666,000
Deposit 61,000
Loan 605,000
Rate 6.50%
Term 25
n 300
i 0.005416667
a) Monthly Repayment 605000/ ((1-1.0055417^-300)/.005417)
Monthly Repayment $4,085.00
b
)
Interest paid in 104th payment (A * ((1-1.005581^-104)/.00581)) * 0.00581)
Interest paid in 104th payment $2,675.67
c) Pay-out before 200th payment 4,085 x ((1-1.005417^-200)/.005417) = 498,152
Pay-out before 200th payment $502,236.93
Question 2:
Particulars Value
Rate 5.35%
Lump sum (15) 131550
Present value 131550/(1+.0535)^15
Present value $60,197
Future value (14) 60,197 x (1+.0535)^14

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Future value (14) $124,869
N 13
Annuity FV/FVIFA(.0535, 13)
Annuity $6,894
Question 3:
a) Annual nominal yield of bond:
Particulars Value
Face value 100,000
Maturity 90
Price 98,980
Effective
rate
{(100000-97915)/98980} x (365/90) = .042
Effective
rate
4.2%
Nominal rate 90 x {(1+i)^(1/90)-1}
Nominal rate 4.1%
The difference between effective and nominal rate is the frequency in which both are
charged, where from the calculation it could be detected that effective rate is changed as the
same frequency, while nominal rate of interest is charged frequently. Hence, it cud be
detected that the that nominal rate of interest if without compounded, while effective rate is
compounded.

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b) The annual rate of return on each of the indices:
Particulars Value
Price index
opened 5,528
closed 6,223
Annual rate1 (6,223-5,528)/5,528
Annual rate1 12.6%
Accumulation index
start 56,123
end 65,103
Annual rate2 (65,103-56,123)/56,123
Annual rate2 16.0%
The major difference between the price index and accumulation index is the measure
in which it detects sensitivity of price. The price index is a normalised average of price
relatives for a given class of goods or services. On the other hand, accumulation index is used
as technical analysis indicator, which evaluates price and volume in the stock market.
Question 4:
a) Calculating the current price of each bond:
Bond Term to maturity (years) Coupon rate (%
p.a.)
Current price
A 3 8% $ 103
B 4 10% $ 110

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C 5 12% $ 121
b) Calculating the duration of each bond:
Bond Term to maturity (years) Coupon rate (%
p.a.)
Current price
A 3 8% $ 100
B 4 10% $ 107
C 5 12% $ 116
c) Calculating price of the bond where market interest rates were to rise in 8%:
Bond Term to maturity (years) Coupon rate (%
p.a.)
Duration
A 3 8% 1.03
B 4 10% 1.10
C 5 12% 1.21
Question 5: Discussing and comparing the attributes that give IRR method its reliability
and assess it capacity to price real options
Internal Rate of Return method is mainly calculated by the organisation for detecting
the level of expected return, which could be earned from the project. The internal rate of
return is mainly calculated by the organisation to detect the level of income, which could be
generated from an investment over its life. Internal rate of return is some times evaluated to

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be the yield in the investment, as it depicts the rate of return, which could be generated from a
particular project. Therefore, managers use the internal rate of return method to detect the
financial viability of the investment, while choosing the most viable investment scope (Bora
2015). There are other investment appraisal methods, which could be used by organisations
in detecting the financial viability of the prospect. However, internal rate of return allows the
company to understand and compare different yield of the project with alternative life span
and investments. In this context, Bornholt (2017) stated that organisation use internal rate of
return, when net present value results does not provide a clear view for the investments. In
addition, the organisations with the help of internal rate of return is able to detect the yield
and thus compare it with the discount rate for detecting the financial viability of the project.
This relevantly indicates that the company will only accept the project when the internal rate
of return is higher that the hurdle rate of the organisation, as it intends to increase its firm
value.
There are certain advantages in using the internal rate of return in accessing the real
options presented to the organisation. The advantages of internal rate of return are depicted as
follows.
Time Value of Money:
The calculation to internal rate of return allows the organisation to compensate for the
time value of money, as future cash flows are adequality evaluated in the formula. Companies
using the method calculates the value of future inflows of the project with the actual initial
investment, which needs to be conducted by the organisation. Hence, internal rate of return is
calculated by detecting the return, which could be provided by project by evaluating the
present value of future cash flows. The main advantages of the calculation are that it uses
time value of money to analyse the actual value of future cash flows by providing equal

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weight for cash flows and initial investment. Dhavale and Sarkis (2018) argued that internal
rate of return ignores size of the investment and only focus on the return, which increases
problem of the organisation during the initiation stage.
Simplicity:
The second advantage of internal rate of return is its simplicity, which could allow the
managers to take adequate investment decisions and detect the project with the higher rate of
return from investment. Hence, small business owners or major organisations are able to get a
snapshot of the investment scope, which is presented from the valuation. In addition,
companies are also able to use the internal rate of return for the purpose of budgeting, which
helps in making investment decisions such as to use new machine or repair the old one. The
simplicity of the internal rate of return allows the managers to make investment decisions,
which could support small and long business activities (Guerra, Magni and Stefanini 2014).
Hurdle rate not required:
The calculation of internal rate of return does not need the hurdle rate or cost of
capital or discounted rate of return for the calculation. However, the internal rate of return is
used by the organisation to analyse the significance of the project and detect whether its value
is higher than the hurdle rate. Hence, it could be understood that the internal rate of return
calculation does not need the discounted or hurdle rate during the calculation process. In
contrast, organisation use the output of internal rate of return calculation to detect the
financial viability of the project and determine the best suitable investment option, which
could increase their returns in future (Mellichamp 2017).
Therefore, it could be understood that organisation use the internal rate of return from
investment during the investment appraisal process to minimise the negative aspects of the

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NPV and other investment techniques. In addition, NPV and IRR is mainly considered by the
managers, as it depicts the actual financial viability of an investment. Therefore, with the help
of Internal rate of return organisations are able to assess projects capacity and detect the real
options for investments.
References and Bibliography:
Arndt, C., Jones, S. and Tarp, F., 2016. What is the aggregate economic rate of return to
foreign aid?. The World Bank Economic Review, 30(3), pp.446-474.
Bora, B., 2015. Comparison between net present value and internal rate of
return. International Journal of Research in Finance and Marketing, 5(12), pp.61-71.
Bornholt, G., 2017. What is an Investment Project's Implied Rate of Return?. Abacus, 53(4),
pp.513-526.
Crosby, N., Devaney, S. and Wyatt, P., 2018. The implied internal rate of return in
conventional residual valuations of development sites. Journal of Property Research, pp.1-
18.
DeFusco, R.A., McLeavey, D.W., Pinto, J.E., Anson, M.J. and Runkle, D.E.,
2015. Quantitative investment analysis. John Wiley & Sons.
Dhavale, D.G. and Sarkis, J., 2018. Stochastic internal rate of return on investments in
sustainable assets generating carbon credits. Computers & Operations Research, 89, pp.324-
336.
Guerra, M.L., Magni, C.A. and Stefanini, L., 2014. Interval and fuzzy Average Internal Rate
of Return for investment appraisal. Fuzzy Sets and Systems, 257, pp.217-241.

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Mellichamp, D.A., 2017. Internal rate of return: good and bad features, and a new way of
interpreting the historic measure. Computers & Chemical Engineering, 106, pp.396-406.
Ng, E.H. and Beruvides, M.G., 2015. Multiple internal rate of return revisited: Frequency of
occurrences. The Engineering Economist, 60(1), pp.75-87.
Ruslan, S.Z.M. and Jaffar, M.M., 2017, May. Application of numerical method in calculating
the internal rate of return of joint venture investment using diminishing musyarakah model.
In AIP Conference Proceedings (Vol. 1847, No. 1, p. 020007). AIP Publishing.
Santandrea, M., Sironi, A., Grassi, L. and Giorgino, M., 2017. Concentration risk and internal
rate of return: Evidence from the infrastructure equity market. International Journal of
Project Management, 35(3), pp.241-251.
Sim, T. and Wright, R.H., 2017. Stock Valuation Using the Dividend Discount Model: An
Internal Rate of Return Approach. In Growing Presence of Real Options in Global Financial
Markets (pp. 19-32). Emerald Publishing Limited.